Dubai: The fall in the oil price is expected to reduce funding and increase withdrawal risk of Middle East sovereign investors but many of these investors are better placed to manage these challenges than in the past, according to Invesco’s Sixth Middle East Asset Management Study 2015.
Established Middle East sovereigns have concerns over withdrawal and funding risk but also feel they are better placed to cope with the challenges than before the global financial crisis. A significant majority (67 per cent) of regional sovereign investors fear funding squeeze due to the sustained fall in oil prices.
“We have highlighted concerns over funding and withdrawals for Middle East sovereigns and the positive perceptions of Middle East risk management processes compared to their pre-global financial crisis position in the oil price theme above,” Nick Tolchard, Head of Invesco Middle East.
Despite the fear of withdrawals, nearly half of Middle East sovereign investors (48 per cent) say they will be able to increase funding from new sources.
The study is based on interviews of established sovereigns and second tier institutional investors, defined as local insurance companies and state pension funds with less than $50 billion in assets, in the Middle East.
There is consensus among participants that Middle East governments will struggle to cut expenses, given high welfare expectations from Middle East locals and underlying political instability in the wider region.
These challenges mean that Middle East sovereigns have more concerns over stability and governance than sovereigns in other regions. Qualitative feedback from interviews indicated that the importance of stability and governance has increased this year while perceptions of performance have decreased.
Stability and governance appear to be a greater challenge for Middle East sovereigns than for peers in international markets. These concerns are driven by oil price falls and the view that withdrawals will justify conservative strategies within sovereigns and reduce reform.
“Specifically, participants in our study noted that the likelihood of adopting new investment strategies and benchmarks, increasing risk asset exposure or reviewing internal asset management strategies had reduced as a result of the oil price fall. We will monitor the extent to which these concerns materialise and impact local investors and international markets, reporting our findings in future studies,” said Tolchard.
On the asset allocation front, emerging markets, infrastructure investments are perceived as an effective tool to manage investment risks by regional sovereigns. Demand for infrastructure is increasing and changing the nature of sovereign collaboration.
The study finds that emerging market infrastructure is a key sub-asset class for established Middle East sovereigns and they are keen to expand sovereign and private sector relationships to ensure access to attractive deals. In asset management many established regional sovereigns are moving towards external active management. The study also finds that currency management is becoming and important concern for both sovereign investors and regional central banks.